Buy These 3 Cheap Mining Stocks as Copper, Iron Ore Set to Sink
Industry followers are expecting a strong recovery for copper and iron ore prices between 2017 and 2018, but in the near term, some say these prices will sink, dragging mining company shares down with them.
This perhaps creates a buying opportunity for shares of NYSE-listed miners BHP Billiton (BHP) - Get Report, Rio Tinto (RIO) - Get Report and Vale (VALE) - Get Report, as analysts call these stocks very inexpensive given current spot commodity prices.
"We expect lower iron ore and copper prices to drag most of these share prices lower at times over the next 3-6 months," Jefferies Christopher LaFemina, Timothy Ward and Patricia Hove wrote Wednesday. "We would buy on weakness as a more sustainable fundamental recovery in 2017-18 is becoming more likely.
The firm said mining shares have performed much better than anticipated this year, as have commodity prices. Indeed, shares of BHP, Rio and Vale are up 21%, 15% and 65% year-to-date as commodities, including copper spot prices, have climbed back from lows hit in January.
Jefferies also said the shares of London Stock Exchange-listed mining companies Glencore, Vedanta and Anglo American are trading at a bargain right now.
Production growth in copper and iron ore in the second half of the year is a concern for Jefferies analysts, who expect near-term volatility in commodity prices as a result.
Significant iron ore and copper supply growth is coming in the second half of 2016 and into 2017, according to Jefferies. The firm points to the iron ore ramp up expected from Vale's S11D project in the Brazilian Amazon, the expansion of which is set to conclude at the end of this year, and the Roy Hill Project, which is under development in West Australia's Pilbara Region, as causes for future price drops.
As for copper, higher grades at Freeport-McMoRan's (FCX) - Get Report Grasberg mine in Indonesia, the ramp up of Australian miner MMG Ltd.'s Las Bambas mine in Peru, and "a wave of supply from several other new projects" are expected to give way to oversupply of the industrial metal in the second half of the year.
"We expect iron ore and copper prices to fall in the [near-term]," Jefferies wrote Tuesday. "We are bullish on copper after 2017 as market deficits are likely to re-emerge and lead to much higher prices."
Jefferies has been indeed been openly bullish on an industrial mining sector that has received poor long-term reviews from several other industry followers recently. Last month BMO Capital Markets analysts said they expect an oversupplied copper market until 2019, partly due to lower demand growth in China.
BMO also named iron ore one of its least preferred commodities due to near-term supply growth from Australia and Brazil stemming from Roy Hill and S11D.
Barclays analysts said Tuesday that while copper prices absorbed the macro blow from Brexit in stride and Freeport's success with the Tenke mine sale have set a good tone for the commodity, global production is growing quickly, mine disruptions have been few, and the metal surplus looks persistent.
Barclays global mining team maintains its call for copper to weaken to $1.90 by year-end, and the firm expects investors are going into the second half pleased with metal companies' operations, anticipating upward estimate revisions, but still concerned with just how long current steel and copper prices can hold.